London-based money manager Schroders PLC surpassed the £1 billion mark in net institutional inflows for the six months ended June 30, and is poised to record annual net inflows for the first time since 2005, when Group Chief Investment Officer Alan Brown joined the company. Schroders reported asset inflows of £3.9 billion ($6.4 billion), including £1.6 billion in the institutional sector, according to the latest financial update published earlier this month for the first half of 2009. This compares with overall outflows of £2.1 billion and institutional outflows of £800 million in the first half of 2008. The key that opened doors is improved performance: 77% of its pooled funds are either ahead of their respective benchmarks or ahead of the median return, depending on the relevant comparison. The percentage of funds that returned above the benchmark or the median hovered around 65% when Mr. Brown arrived, although there were fewer strategies available at the time.
Pension funds moving away from balanced mandates — which had been Schroders' forte — had been leaving the firm since the late 1990s. The company, whose history stretches back to 1804, took a further blow when the economic crisis hit in late 2007. Similar to other firms, assets under management plummeted from £139 billion at year-end 2007 to £110.2 billion a year later. But Mr. Brown also saw the global recession as an opportunity to rebuild Schroders' brand, including its reputation in the U.S. With four decades of money management experience anchored by his first love in physics, he applies inductive and deductive reasoning not only to such professional goals as improving investment performance, but also to his private pursuit of an econometric model for valuing wine. His verdict for the 2008 vintage? “Pricing is realistic and the vintage is supposed to be a lot better than expected,” Mr. Brown said in a recent interview.
Is this the beginning of a turnaround? This is turning out to be, so far, a very good year for us, with strong investment performance and significantly improved sales results, both on the retail front and the institutional front. ... Now we never ever forecast what our position will be or how long that position will be sustained, but we have every reason to believe and are reasonably confident that the picture looks good partly because of the very strong performance results we've had and partly because of the level of unfunded wins.
What strategies have received the most inflows? Encouragingly, inflows have been pretty broadly based to include fixed income, quantitative equities and emerging-market equities ... There are other reasons (besides performance) that have been working in our favor: We are obviously an old name in the business; we're a pure asset manager so we're not bound up as part of a broader financial conglomerate; we have a very stable shareholder base — the (Schroder) family still owns 48%. We have an incredibly strong balance sheet with significant excess capital and not a penny of debt. The things that we do are reasonably traditional, reasonably transparent and reasonably priced. In today's world, all of those softer attributes are important as well as the pure (performance) numbers.
While AUM has markedly improved, revenue has fallen partly due to lower performance fees. Are you concerned? Performance fees tend to be quite volatile ... we have strong underlying performance so there's no reason why they shouldn't bounce back at some stage. Lower fees do reflect a slight change in the mix of assets, again reflecting customer demand. We've had strong flows into fixed income and obviously fixed-income products tend to have a basis-point charge which is significantly less than equities.
What are the holes to plug in terms of Schroders' talent and investment capabilities? One of our great strengths is to be well diversified, in terms of our business, by regions, by channels and by strategies. That gives us one element of strength and our prime focus is building our business organically. That does not mean we won't do acquisitions if the right thing comes along. For us to want to do an acquisition, we want to find a business which has good prospects and which is cheap. Unfortunately, we usually find one or the other of those characteristics, but not often both. The acquisitions that we've done since I've been here have tended to be pretty small and of the bolt-on type. They tended to be things we've not been doing or not been doing with any significant scale.
What attributes would you be looking for? If you look at what we've actually done (since 2005) ... with hedge funds of funds, we had one but it wasn't very significant so we (acquired) NewFinance Capital. Although we have quite a big property business, we didn't have a European property business so we acquired Aareal (Asset Management GmbH). With the Swiss Re third-party business in Switzerland, there wasn't much product overlap in terms of the skills they brought to the table compared to the skills we already had in residence in Switzerland.
We're very cautious as an asset management firm. We're not a huge believer in making lots of acquisitions because you tend to put a lot of goodwill on the balance sheet, and there's no better way of reducing return on capital than loading (the balance sheet) up with goodwill.
Are there specific areas Schroders might be interested in acquiring? We've talked about trying to find a balance in our business; people tend to still think of us as equity house and a traditional equity house. Equity is actually about 50% of our business now. I guess we'd still like to see a broader business in the alternatives and fixed-income space.
What is your growth strategy in the U.S.? Our strategy to rebuild in the United States has several elements to it. First of all, we had to win back our spurs in the areas where we had lost mandates. We've basically served our time repairing the records, retuning our investing desk and putting ourselves in a position where we can be in contention again.
The second plank of the strategy was to broaden the products that we took to the United States. So on top of that, we've broadened to include quantitative equities, commodities, emerging market debt.
The last plank of the strategy was to also consider going into the intermediary channel ...
I believe our business (in the United States) is about 10% of the total (worldwide assets) and, in due course, we'd like to see that grow initially to 20% or so over the next several years.
You've generally been very cautious about the current rally. Is that still your view? The note of caution comes from this — it's not obvious that a problem which is created by too much debt is solved by the creation of yet more debt. It's rather like deciding to help an alcoholic on the street by giving him another bottle of whiskey.
On the other hand, one has great sympathy with the view that if the private sector was unwilling or unable to borrow, then the public sector should step in to avoid a complete collapse and that's what they've done ...
The catch here is that quantitative easing is the equivalent of man on his knees bellowing in front of a fire. We've certainly got the embers of the economy glowing again, but when we finally get off our knees, will we have sufficient final demand to carry it on? We are increasing our forecast for economic growth, so we're somewhat more confident that we will see this, and certainly the green shoots are clearly visible.